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Characteristics Assumptions Principles Constraints
Understandability Relevance Comparability Reliability
Monetary unit Economic entity Time period Going concern
Revenue recognition Matching Full disclosure Cost
Materiality Cost-benefit
KIMMEL RAPID REVIEW
Financial Accounting: Tools for Business Decision-Making , Third Canadian Edition
ACCOUNTING CONCEPTS (Chapters 1-4)
ADJUSTING ENTRIES (Chapter 4)
Type Original Entry Adjusting Entry Prepayments 1. Prepaid expenses Asset account Cash
Expense account Asset account
- Unearned revenues Cash Liability account
Liability account Revenue account Accruals 1. Accrued revenues No entry Asset account Revenue account
- Accrued expenses No entry Expense account Liability account
Note: 1. Each adjusting entry will affect one or more statement of earnings accounts and one or more balance sheet accounts.
- Adjusting entries never include the Cash account.
Interest Calculation
Interest = Face value × Annual interest rate × Time (# of months ÷ 12)
CLOSING ENTRIES (Chapter 4)
Purpose
- Update the Retained Earnings account by transferring net earnings (loss) and dividends to retained earnings.
- Prepare the temporary accounts (revenue, expense, dividends) for the next periodʼs postings by reducing their balances to zero.
ACCOUNTING CYCLE (Chapter 4)
Assets (^) Liabilities (^) Shareholders’ Equity
Assets Liabilities Common Shares Retained Earnings Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Revenues Expenses Dividends Dr.
Cr.
Dr. Cr.
Dr. Cr.
BASIC ACCOUNTING EQUATION (Chapter 3)
7 Prepare financial statements: Statement of earnings Statement of retained earnings Balance sheet 5 Journalize and post adjusting entries: Prepayments/Accruals
6 Prepare an adjusted trial balance
4 Prepare a trial balance
3 Post to general ledger accounts
2 Journalize the transactions
1 Analyze business transactions 9 Prepare a post-closing trial balance
8 Journalize and post closing entries
Process
- To close revenue accounts: Debit each individual revenue account for its balance and credit Income Summary for total revenues.
- To close expense accounts: Debit Income Summary for total expenses and credit each individual expense account for its balance (assuming normal balances).
- To close income summary: Debit Income Summary for the balance in the account (or credit if a net loss) and credit (debit) Retained Earnings.
- To close dividends: Is the balance in the Income Summary account, before transfer to the Retained Earnings account, equal to the net income (loss) reported in the statement of earnings? Debit Retained Earnings and credit Dividends for the balance in the account. STOP AND CHECK: Is the balance in the Income Summary account, before transfer to the Retained Earnings account, equal to the net income (loss) reported in the statement of earnings? Does the balance in the Retained Earnings account equal the ending balance reported in the balance sheet and statement of retained earnings? Are all of the temporary account balances zero?
Event Perpetual Periodic Purchase of goods Inventory Cash (A/P)
Purchases Cash (A/P) Freight (shipping point) Inventory Cash (A/P)
Freight In Cash (A/P) Return of purchased goods
Cash (A/P) Inventory
Cash (A/P) Purchase Returns Sale of goods Cash (A/R) Sales Cost of Goods Sold Inventory
Cash (A/R) Sales No entry
Return of sold goods (assuming resaleable)
Sales Returns and Allowances Cash (A/R) Inventory Cost of Goods Sold
Sales Returns and Allowances Cash (A/R)
No entry
Adjustment of inventory in accounting records to lower physical count amount
Cost of Goods Sold Inventory
No entry
End of period No entry Closing or adjusting entry required
Perpetual vs. Periodic Journal Entries
Periodic Inventory—Formula for Cost of Goods Sold
Beginning Cost of Cost of Goods Ending Cost of
Inventory Goods Sold Available for Sale Inventory Goods Sold
Inventory Cost Flow Assumptions
Perpetual Periodic Specific identification First-in, first-out (FIFO) First-in, first-out (FIFO) Moving average Weighted average Last-in, first-out (LIFO) Last-in, first-out (LIFO)
CASH (Chapter 7)
Principles of Internal Control
Establishment of responsibility Segregation of duties Documentation procedures Physical controls Independent verification (internal and external) Other controls
Bank
Balance per bank statement Add: Deposits in transit Deduct: Outstanding cheques Adjusted cash balance
Bank Reconciliation
Books
Balance per books Add: Unrecorded credit memoranda from bank statement Deduct: Unrecorded debit memoranda from bank statement Adjusted cash balance
Note: 1. Errors should be offset (added or deducted) on the side that made the error.
- Adjusting journal entries should only be made on the books side.
STOP AND CHECK: Does the balance in the general ledger cash account equal the adjusted cash balance?
Event Journal Entry Record credit sales Accounts Receivable Sales Estimate bad debts Bad Debts Expense Allowance for Doubtful Accounts Write-off uncollectible account Allowance for Doubtful Accounts Accounts Receivable Subsequent recovery Accounts Receivable Allowance for Doubtful Accounts Cash Accounts Receivable
BAD DEBTS (Chapter 8)
LONG-LIVED ASSETS (Chapter 9)
Tangible Intangible Property, plant, and equipment Natural resources
Intangible assets, limited lives Intangible assets, indefinite lives
INVENTORY (Chapters 5 and 6)
Ownership
Freight Terms Ownership of Goods FOB Shipping point Buyer FOB Destination Seller
IRREGULAR ITEMS (Chapter 14)
Discountinued operations Statement of earnings (presented separately after earnings from continuing operations) Extraordinary items Statement of earnings (presented separately after earnings before extraordinary items) Changes in accounting principle
Statement of retained earnings (adjustment of beginning retained earnings)
Note: These items are net of income tax.
Order of Preparation Date
- Statement of earnings Period ended
- Statement of comprehensive income Period ended
- Statement of retained earnings Period ended
- Balance sheet End of the period
- Cash flow statement Period ended
FINANCIAL STATEMENTS
Name of Company
Statement of Earnings
Period Ended
Sales revenues Sales $X Less: Sales returns and allowances $X Sales discounts X X Net sales X Cost of goods sold Beginning inventory $X Purchases $X Less: Purchase returns and allowances X Net purchases X Add: Freight in X Cost of goods purchased X Cost of goods available for sale X Less: Ending inventory X Cost of goods sold X Gross profit X Operating expenses (Examples: store salaries, advertising, delivery, rent, amortization, utilities, insurance) X Earnings from operations X Other revenues (Examples: interest, gains) $X Other expenses (Examples: interest, losses) X^ X Earnings before income taxes X Income tax expense X Net earnings $X
Statement of Earnings (periodic inventory system)
Event Cost Equity
Acquisition Equity Investments
Cash
Equity Investments
Cash
Investee reports
earnings
No entry Equity Investments
Investment Revenue
Investee pays
dividends
Cash
Dividend Revenue
Cash
Equity Investments
CASH FLOW STATEMENT (Chapter 13)
Operating activities ( indirect method )
Net earnings
Add: Decreases in noncash current assets $X
Increases in noncash current liabilities X
Amortization X
Losses on disposals of assets X
Deduct: Increases in noncash current assests (X )
Decreases in noncash current liabilities (X )
Gains on disposals of assets (X )
Cash provided by (used in) operating activities $X
Operating activities ( direct method )
Cash receipts
(Examples: from sales of goods and services to customers, from receipts
of interest and dividends on loans and investments) $X
Cash payments
(Examples: to suppliers, for operating expenses, for interest, for taxes) (X )
Cash provided by (used in) operating activities $X
Comparison of Cost and Equity Methods of Accounting for Long-Term Equity
Investments
Balance Sheet
Name of Company Balance Sheet End of the Period Assets Current assets (Examples: cash, short-term investments, accounts receivable, merchandise inventory, prepaids) $X Long-term investments (Examples: equity investments, debt investments) X Property, plant, and equipment (Examples: land, land improvements, buildings, equipment, natural resources) $X Less: Accumulated amortization X X Intangible assets Limited life intangibles (Examples: patents, copyrights) (net of accumulated amortization) $X Indefinite life intangibles (Examples: trademarks, franchises, goodwill) X X Total assets $X
Liabilities and Shareholders Equity
Liabilities Current liabilities (Examples: notes payable, accounts payable, accruals, unearned revenues, current portion of notes payable) $X Long-term liabilities (Examples: notes payable, bonds payable) X Total liabilities X Shareholders equity Common shares $X Retained earnings X X Accumulated other comprehensive income X Total liabilities and shareholders equity $X
STOP AND CHECK: Total assets on the balance sheet must equal total liabilities and shareholdersʼ equity; and, ending retained earnings on the balance sheet must equal ending retained earnings on the statement of retained earnings.
Name of Company Statement of Comprehensive Income Period Ended Net earnings $X Other comprehensive income Unrealized gains and losses on available-for-sale securities $X Foreign currency translation adjustment $X X Comprehensive income $X
Cash Flow Statement
STOP AND CHECK: Cash, end of the period, on the cash flow statement must equal cash presented on the balance sheet.
FINANCIAL STATEMENTS (Continued)
Name of Company Cash Flow Statement Period Ended Operating activities Note: May be prepared using the direct or indirect method Cash provided by (used in) operating activities $X Investing activities (Examples: purchase / sale of long-term assets) Cash provided by (used in) investing activities X Financing activities (Examples: issue / repayment of long-term liabilities, issue of shares, payment of dividends) Cash provided by (used in) financing activities X Net increase (decrease) in cash X Cash, beginning of the period X Cash, end of the period $X
Statement of Comprehensive Income
